Yamal LNG: Russia’s Backup Plan
Russia’s gas & oil market has had a tumultuous time with US sanctions, continuing EU restrictions and Danish legislation, blocking Nord Stream 2 pipeline from going through Danish territorial waters. How can Russia bypass these hurdles and ensure their gas supply doesn’t diminish? The answer is: by diversifying its gas sources.
Gazprom’s share of the aggregate Russian gas production has fallen from 90% in 2000 to 65% in 2016. The situation is also exacerbated by the growing popularity of spot contracts, limiting the security of long-term contracts Gazprom is heavily relying on. At the same time, other Russian gas suppliers enjoyed a steady growth of production capacity, producing more than 210 billion m3 of gas, showing that diversification is the right path to take.
The aforementioned pipeline project would add an alternative connection between Russia and Germany, doubling Russia’s export capacity. Even in the face of adversity, Gazprom is sure the project will come to fruition as had Yamal LNG under similar circumstances when the US blocked financing from the west in 2014. Novatek, the majority owner of the project, secured a loan from Chinese banks instead and the gas facility was eventually built. But will this project add to or interfere with the pipeline supply?
President Putin is adamant that LNG exports should not disrupt the pipeline gas market, but could diversify Russia’s exports and ensure energy security. Gazprom already has LNG projects like Sakhalin-2 LNG and now Russia can utilize another natural gas revenue stream in the form of Yamal LNG. In December 2017 Yamal LNG, one of the biggest LNG projects in the world, began its gas exports. The facility is chiefly owned by Novatek, the largest Russian independent gas producer. It is expected that at full capacity the natural gas facility will be able to meet a demand of 16.5 mtpa of LNG and supply it to Asian and European markets. Because of the cost competitive advantage due to lack of sensitivity to low oil prices the exports could grow to 20 mtpa and more in the coming decade.
This means that even with diminished pipeline capacities as a result of US interference, Russia will not lose its influence and dominance in the European market. The diversification strategy appears to already be working. UK, one of the harshest critics of Russia and an ardent supporter of sanctions against the country, is the recipient of Yamal LNG maiden voyage’s shipment that was originally intended for Asia. This proves that Russia is a powerhouse in the gas market and is unlikely to be stopped by western competitors.